Cost of Acquisition: A Detailed Overview
Cost of acquisition is the term used to describe the expenses made by an individual or corporation in the process of purchasing an asset. It is stated in Section 55(2) of the Income Tax Act, 1961. This cost consists of the asset's purchase price plus any other additional costs. It includes stamp duty and registration fees, that were incurred throughout the acquisition process. The main difference between the selling price and the cost of acquisition is what is deemed to be the capital gain or loss on the sale of the asset.
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A person can acquire ownership of a capital asset through a variety of means in addition to purchase. Section 49 provides instructions on how to calculate the cost in various situations. As per Section 49, the acquisition cost of the asset shall be deemed to be the same as the original asset's cost, and the holding period shall be assessed as the original asset's holding period. This can happen in the event that an asset is transferred among designated relatives, or as a consequence of a Hindu undivided family partition, or as a result of a company merger or demerger. In this article, we will explain the concept of cost of acquisition in detail.
Deemed Cost of Acquisition under Section 49
As long as Section 49's requirements are satisfied, the asset's acquisition cost for the current owner will be considered equal to the cost incurred by the former owner when they bought it. Stated otherwise, the asset's acquisition cost for the purposes of computing capital gains tax will be determined by taking the asset's prior owner's purchase price.
Applicability of Section 49
According to Section 49, the provision will not be applicable unless certain requirements are satisfied. First and foremost, the prior owner had to have purchased the capital asset. This implies that the asset's prior owner had to have paid for it with their own money. Second, the asset must have been in the possession of the former owner for more than a year prior to the date of the gift or inheritance. This guarantees that the asset was owned as a long-term investment by the prior owner. Last but not least, the transfer had to occur on or after April 1, 1981, the date the clause went into force.
Cost of Previous Owner Deemed as Cost of Acquisition
The price at which the asset was purchased by the property's previous owner will be considered the acquisition cost in the following scenarios. The cost of asset upgrade incurred by the assessee or the prior owner must be applied to these expenses:
When the assessee has acquired the ownership of the capital asset:
On any asset distribution on the whole or in part of a HUF
In a gift or will
By devolution, inheritance, or succession
On any distribution of assets following a business's liquidation
The transfer is followed by an irreversible or revocable trust
Under any transfer of capital gains, as described in sections 47(iv) and 47(v) of the relevant legislation, made by a holding institution to its completely owned subsidiary Indian business or by a subsidiary company to its 100% holding Indian institution.
Under any transfer of a capital asset from the amalgamating business to the combined Indian firm, as mentioned in section 47(vi), in an amalgamation plan
Under any demerger plan in which the combined business transfers a capital asset to the resulting Indian firm, as mentioned in section 47(vi).
By an individual using the method mentioned in section 64(2) to transfer his separate property into a HUF property.
Since the former owner's holding of the asset must also be taken into account, section 2(42A) stipulates that in all such circumstances, the transferee's time of ownership of the capital asset will also be determined.
Cost of Acquisition of Shares: Received under the Scheme of Amalgamation
The cost of acquiring those shares for him will be considered the cost of acquiring those shares in the amalgamating company [Section 49(2)]. This happens in the event that an Indian company's shares in an amalgamated company are acquired by the assessee as a result of the transfer of shares referred to in section 47(vii) that he held in the amalgamating company under a scheme of amalgamation.
Cost of Acquisition of Shares: Received during the Process of Conversion of Debentures, Debenture Stock, Bonds, or Deposit Certificates
It is feasible that someone acquired shares or debentures in a business through the conversion of bonds, debenture stock, or deposit certificates that were mentioned in section 47(x). In this scenario, Section 49(2A) states that the cost of acquisition for the individual is the portion of the cost of the debentures, debenture stock, bond, or deposit certificate that the individual purchases.
Cost of Acquisition of Sweat Equity Shares or Specified Security
Section 49(2AA) states that the cost of acquiring specified securities or sweat equity shares that result from the transfer of shares mentioned in section 17(2)(vi) would be equal to their fair market value after accounting for perquisite valuation.
Cost of Acquisition of Equity Shares: Received on Conversion of Preference Shares
The portion of the preference share's cost that the assessee pays for the acquisition of an equity share of a company that became their property as a result of the transfer mentioned in Section 47(xb) will be considered the cost of acquiring that equity share [Section 49(2AE)].
Cost of Acquisition of Shares in the Resulting Company: Received in the Scheme of Demerger
The cost of purchasing shares in the resulting company after a demerger is calculated as follows: Section 49(2C) states that the cost of purchasing shares held by the assessee in the demerged company is divided by the ratio that the net book value of the gains transferred during a demerger bears to the net worth of the demerged institution prior to the demerger.
Cost of Acquisition of Shares in a Demerged Firm
As per Section 49(2D), the sum determined by sub-section (2C) will be considered as a reduction in the cost of acquisition of the shareholder's original shares in the demerged firm.
Cost of Acquisition of Property Taxable under Section 56(2)(x)
The cost of acquiring the property will be considered the value considered for the purposes of section 56(2)(x) [Section 49(4)] if the capital gain results from the transfer of such property that has been subject to tax under section 56(2)(x).
Cost of Acquisition of Capital Assets: Share in the Project under section 45(5A)
The acquisition cost of an asset is defined by the amount deemed to be the full value of consideration in that sub-section. It is the stamp duty value on the date the certificate of completion is issued plus cash consideration. This happens in cases where the capital gain results from the transfer of a capital asset, which is a share in the project in the form of land or building, or both, defined in section 45(5A) which is taxable in the last year in which the certificate is completed.
Cost of Acquisition of a Capital Asset used by the Assessee as an Inventory
According to Section 49(9), the cost of acquiring a capital asset is equal to the inventory's fair market value as of the conversion date, as determined in the prescribed manner. This applies when the capital gain results from the transfer of a capital asset that the assessee used as inventory prior to its conversion into a capital asset.
Calculation of Cost of Acquisition
As a result of rising prices, money's purchasing power—or the amount of products one unit of money can purchase—declines with time. Due to inflation, even if two units of products may be purchased for Rs 100 today, only one unit might be accessible for that price tomorrow. The Cost Inflation Index (CII) is a tool used to calculate how much inflation contributes to annual price increases for assets and goods. The year of purchase and the actual cost of acquisition are required in order to compute the indexed cost of acquisition, which can be done as follows:
Indexed cost of acquisition= Cost of acquisition X (CII of the year of transfer / CII of the year of acquisition or FY 2001–02, whichever comes later)
Conclusion
The cost of acquisition is a critical concept from a taxation perspective. As you acquire an asset, you should be aware of its cost and tax implications to stay on the right side of the tax guidelines. While this guide provides a detailed overview, consulting an expert always makes sense as it enables you to make the right decisions.
FAQ
Q1. What is the deemed cost of acquisition as per Section 49 of the Income Tax Act?
The cost of acquisition to the last owner who bought it is the deemed cost of acquisition under Section 49. In other words, the cost at which the prior owner acquired the item will be used to determine the cost of acquisition for the purposes of computing capital gains tax.
Q2. Can the deemed cost of acquisition be enhanced by the current owner?
No, the present owner is not permitted to increase the presumed cost of purchase as established by Section 49. The price paid for the asset by the prior owner can only be the considered cost of acquisition.
Q3. What does the cost of acquisition mean in business development?
The entire sum of money a company spends acquiring new customers, acquiring assets, or taking over a rival is known as the acquisition cost in business. It is a crucial company metric that's utilised in sales and accounting.
Q4. What is included in the cost of acquisition for capital gain?
The price the assessee paid when they first purchased an item is known as the asset's acquisition cost. It covers capital costs spent in connection with the purchase or to finalise the property's title.
Q5. How is the cost of acquisition of a property computed?
It is determined by dividing the sales cost of the property by the cost inflation index of the year the property was sold. After that, multiply the result by the cost inflation index of the year the property was bought.
Q6. Is stamp duty value added to the cost of acquisition?
You also agree to pay the stamp duty, registration fee, and transfer costs when you sign a contract to buy real estate. These undoubtedly contribute to the purchasing cost.
Q7. What is the index cost of acquisition in income tax?
The assessee receives index cost of acquisition as a benefit from gains on long-term capital assets. A reduced capital gain tax is the outcome of indexing the cost, which allows for inflation adjustment and an increase in cost.
Q8. What is the key benefit of the Indexed Cost of acquisition?
A capital gain will be computed with the advantage of indexed acquisition cost if a capital asset meets the criteria for being classified as a long-term capital asset due to its holding time. A lower capital gain and thus a reduced capital gain tax are the outcomes of this indexed cost's assistance in raising the cost deductible from the sale consideration.
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